Life Insurance Basics

What is life insurance?

Life insurance is a contract binding a life insurance company to
compensate a beneficiary for the death of a person insured. If the
insured dies the company will provide a cash payment to the
beneficiary. Life insurance is used to protect the economic value
of a human life with regards to those who may be financially
dependent upon it.

Uses of life insurance

Life insurance has many uses for both individuals and businesses.
Some common uses include:

Individual Uses

Funeral - Life insurance proceeds can ensure
that there is enough money for proper funeral and burial
expenses.

Debt - Personal bills, credit card debt,
student loans, and personal notes can be covered by life insurance
in the event of an individual's death.

Mortgage Protection - The proceeds of a life
insurance policy can pay off the balance of a mortgage or provide
an income stream to pay monthly mortgage or rent payments.

Income Replacement - In the event of an
individual's death, life insurance proceeds can provide a
supplemental income stream to ensure that the surviving family
members are able to maintain the same standard of living.

Education - Life insurance proceeds can ensure
that the education costs of the insured's children are
covered.

Taxes - Federal estate and state inheritance
taxes can be pre-funded using life insurance to preserve the value
of an estate.

Donations/Gifts - An individual can use a life insurance policy
to fund a donation to a charity or leave a gift to a family
member.

Business Uses

Key-Person - A life insurance policy can be
used to protect a business from the loss of income and profits
caused by the death of a key employee. For more information go to
Key-Person Insurance in the advanced life section.

Business Continuation - Life insurance can be
used to fund a buy/sell agreement or stock redemption plan to
determine enable a partner or group of employees to buy the
business interest of a deceased partner. For more information go to
Business Continuation Planning in the advanced life section.

Business Loans - Life insurance protection on
a key employee or business owner can be used to pay off the debts
of a business in the event of that individual's death.

Employee Benefits - Life insurance protection
for employees is commonly included in company employee benefits
plans.

Determining your needs

There is no magic formula to determine how much life insurance you
should have; however, there are a number of factors that should be
considered when estimating how much life insurance you should
carry. They include:

Final Expenses - These could be unpaid
hospital bills, funeral expenses, unpaid debts, probate costs, and
estate and inheritance taxes.

Readjustment Fund - This may be used to
cushion the immediate lifestyle adjustment that a family must make
when a loved one dies. The family may be forced to move, or the
surviving spouse might have to look for a new job. In addition, a
working spouse may find it difficult to return to work immediately
after the death of a partner. The readjustment fund allows for
adequate bereavement due to loss.

Supplemental Income - After the readjustment
period, there should be a consistent income stream to help pay for
the family's living expenses, such as mortgage payments, monthly
bills, and daycare.

Educational Funds - Adequate funds should be
available for the childrens' education. This might include
elementary school, high school, and college.

Retirement Fund - There should also be
adequate funds available to ensure that the spouse can retire
comfortably.

These are some factors that you should consider carefully when
estimating how much life insurance you need. Everyone's life
insurance needs are different but, in general, an individual's
needs are greatest from the time they start their careers or a
family until they reach retirement, at which time many individuals'
needs for life insurance diminish. It is important to remember that
you should review your life insurance needs annually to account for
changes in your family's lifestyle.

Types of life insurance

Term Life Insurance

Term life insurance provides protection for a specified period
of time. A death benefit is paid to the beneficiary if the insured
dies within a specified period of time while the policy is still in
force. Many term life insurance plans can be converted to permanent
life insurance plans without evidence of insurability.

Level premium term life insurance has premiums which remain
level over a specified period of time. These plans have premiums
that remain level for a period of 5, 10, 15, 20, 25, and 30 years.
After the initial level period expires, the annual premium
increases each year, subject to a guaranteed maximum.

In general, term life insurance is suitable when your life
insurance needs are temporary or your life insurance needs are
long-term but your budget does not permit the higher premiums of
permanent life insurance.

What is Return of Premium (ROP) Term Life Insurance
Policy?

A return of premium term life insurance policy typically offers
a level death benefit with fully guaranteed* level premiums for the
first 15, 20, or 30 years, though this may vary by company and
state. Under the return-of-premium feature, the cumulative premiums
paid, not including substandard and rider charges, will be returned
at the end of the level term period if the policy is in force at
that time. Often, a portion of the cumulative premiums will be
returned upon surrender after the policy has been in force for a
specified number of years. Most return of premium life insurance
policies allow for conversion to permanent insurance offered by the
same company during the covered period without further evidence of
insurability. *guarantees subject to the claims-paying ability of
the underwriting insurance company

Whole Life Insurance

life insurance is permanent life insurance and provides
protection for life. As long as premiums are paid, a death benefit
is paid to the beneficiary. The premiums for whole life insurance
policies are designed to remain level over time. In addition, these
policies accumulate cash values on a tax-deferred basis. The rate
of return on whole life insurance cash values is dependent upon a
number of factors including the results of an insurance company's
investment performance. Cash values can be used for a variety of
options:

The policy can be surrendered at anytime for the cash surrender
value.

The policy owner can take out a loan and use the cash value as
collateral.

The policy can be changed to a reduced death benefit amount
that is paid up.

The cash values may be used to pay premiums for a certain
period of time.

The cash surrender value can be used to supplement retirement
income.

The cash values of whole life insurance policies may be affected by
a life insurance company's future performance. Some factors that
influence a life insurance company's performance are expenses,
mortality experience, and investment performance.

Universal Life Insurance

Universal life insurance is permanent life insurance. As long as
premiums are paid, a death benefit is paid to the beneficiary.
These policies are different from whole life insurance policies
because they offer the policy owner some flexibility to change the
premium payments and death benefit. The death benefit may be
increased subject to insurability or decreased, and the premiums
can also be increased and decreased as well as skipped. Universal
life insurance policies may be purchased with one of two different
death benefit options. One is a level death benefit and the second
is an increasing death benefit. Although premium payments are
flexible, a universal life policy will usually have a target
premium which is the suggested annual premium payment. The target
premium for some companies is sufficient to keep the policy
in-force to age 100; however, this is not guaranteed. Universal
life insurance policies also accumulate cash values on a
tax-deferred basis. These cash values tend to be interest-sensitive
and can be used for a variety of options:

The policy can be surrendered at anytime for the cash surrender
value.

The policy owner can take out a loan and use the cash value as
collateral.

The policy can be changed to a reduced amount paid-up whole
life policy.

The cash values may be used to pay premiums for a certain
period of time.

The cash surrender value can be used to supplement retirement
income.

Universal life insurance policies are valuable because they can
provide permanent protection and accumulate cash values that can be
used for emergencies or for meeting specific objectives. For those
who prefer flexibility, universal life insurance provides more
options than whole life insurance.

The cash values of universal life insurance policies may be
affected by a life insurance company's future performance. Some
factors that influence a life insurance company's performance are
expenses, mortality experience, and investment performance.

Variable Life Insurance

Variable life insurance is permanent life insurance and provides
protection for life. As long as premiums are paid, a death benefit
is paid to the beneficiary. The premiums for variable life
insurance policies are designed to remain level over time. In
addition, these policies accumulate cash values on a tax-deferred
basis with the potential for higher rates of return than
traditional whole life policies. Variable life insurance policies'
cash values vary with the investment results of funds chosen by the
policy owner. The policy owner is given a choice of investment
options which are usually stock, bond and money market funds.
Unlike whole life insurance policies which have guaranteed cash
values, the cash values of variable life insurance policies are not
guaranteed. The cash values of variable life insurance policies can
be used for a variety of options:

The policy can be surrendered at anytime for the cash surrender
value.

The policy owner can take out a loan and use the cash value as
collateral.

The cash values may be used to pay premiums for a certain
period of time.

The cash surrender value can be used to supplement retirement
income.

Variable life insurance policies are valuable because they
provide permanent protection and may accumulate cash values;
however, these policies carry more risk than traditional whole life
insurance policies. Individuals considering purchasing a variable
life insurance policy should be experienced investors in equity
investments.

The cash values of variable life insurance policies may also be
affected by a life insurance company's future performance. Some
factors that influence a life insurance company's performance are
expenses and mortality experience.

Variable Universal Life Insurance

Variable universal life insurance is permanent life insurance. As
long as premiums are paid, a death benefit is paid to the
beneficiary. These policies are different from variable life
insurance policies because they offer the policy owner some
flexibility to change the premium payments and death benefit. The
death benefit may be increased or decreased, and the premiums can
also be increased and decreased as well as skipped. Variable
universal life insurance policies may be purchased with one of two
different death benefit options. One is a level death benefit and
the second is an increasing death benefit. In addition, these
policies accumulate cash values on a tax-deferred basis with the
potential for higher rates of return than traditional whole life
policies. The cash values of variable universal life insurance
policies vary with the investment results of funds chosen by the
policy owner. The policy owner is given a choice of investment
options which are usually stock, bond and money market funds.
Unlike universal life insurance policies which have guaranteed cash
values, the cash values of variable universal life insurance
policies are not guaranteed. The cash values of variable universal
life insurance policies can be used for a variety of options:

The policy can be surrendered at anytime for the cash surrender
value.

The policy owner can take out a loan and use the cash value as
collateral.

The cash values may be used to pay premiums for a certain
period of time.

The cash surrender value can be used for retirement
income.

Variable universal life insurance policies are valuable because
they can provide permanent protection and may accumulate cash
values; however, these policies carry more risk than traditional
universal life insurance policies. Individuals considering
purchasing a variable universal life insurance policy should be
experienced investors in equity investments.

The cash values of variable universal life insurance policies
may also be affected by a life insurance company's future
performance. Some factors that influence a life insurance company's
performance are expenses and mortality experience.

Second-to-Die or Survivorship Life Insurance

A second-to-die life insurance policy insures the lives of two
people, typically a husband and a wife. The death benefit is not
paid to the beneficiary until the death of the second insured.
These life insurance policies are generally available as either
whole life insurance or universal life insurance policies, and
premiums are often less expensive than buying two life insurance
policies.

Second-to-die life insurance policies are effective tools often
used by wealthy individuals in estate planning. They can be used to
pay for estate taxes. By removing the proceeds of a life insurance
policy through the use of gifting policies and third party
ownership, a life insurance policy can be used to pay for estate
taxes. Careful planning by your tax and legal counsel, coupled with
a properly structured second-to-die life insurance policy, can help
you preserve your net worth.

Beneficiary designation

A beneficiary is a person or entity named to receive a portion
of the death benefit of a life insurance policy. The owner of a
life insurance policy may name multiple beneficiaries, and most
insurance companies permit the policy owner to change
beneficiaries.

There are two types of beneficiaries: primary and contingent. A
primary beneficiary has the first claim to the proceeds of a life
insurance policy should the insured die. There may be more than one
primary beneficiary and the proceeds do not have to be shared
equally. The policy owner of a life insurance contract may also
name a contingent or secondary beneficiary. The contingent
beneficiary has claim to a portion of the death proceeds should the
primary beneficiary(s) be removed or die prior to the death of the
insured. There may also be more than one contingent
beneficiary.

Many individuals designate a spouse as the primary beneficiary
of their life insurance policy and the children as contingent
beneficiaries. You should consult with an estate-planning attorney
prior to making a minor child a beneficiary of a life insurance
policy. In addition, anyone contemplating making their estate the
beneficiary of their insurance policy should use extreme caution
and consult with an estate planning attorney prior to doing so.

Settlement options

The life insurance policy owner may designate a specific settlement
option to be paid upon his or her death. If the policy owner does
not choose a specific option, the beneficiary(s) will be given a
number of choices. These usually include:

Lump Sum Payment - The death proceeds of a
life insurance policy are paid to the beneficiary(s) in one lump
sum payment.

Fixed Period Payments - The death proceeds of
a life insurance policy are paid to the beneficiary(s) for a fixed
period.

Life Income with Installments Certain - The
death proceeds of a life insurance policy are paid to the
beneficiary(s) in installment payments through a certain period.
After the certain period, payments will continue to be made
throughout the beneficiary's lifetime but the payment may vary from
the payments during the certain period.

Interest Payments - The death proceeds of a
life insurance policy remain with the insurance company and the
company pays the beneficiary interest payments.

Fixed Installments - The death proceeds of a
life insurance policy are paid to the beneficiary(s) in fixed
installments until the proceeds and interest on the unpaid balance
of the proceeds are exhausted.

Single Premium Annuity - The proceeds of a
life insurance policy are used to purchase a single premium annuity
from the insurance company.